Solution Chapter 18

Chapter 18

Problem I 1. Journal entry to record sale:

Cash 84,000

Accumulated Depreciation 80,000

Equipment 150,000

Gain on Sale of Equipment 14,000

Record the sale of equipment:

P84,000 = P150,000 - P80,000 + P14,000

P80,000 = (P150,000 / 15 years) x 8 years

2. Journal entry to record purchase:

Equipment 84,000

Cash 84,000

Journal entry to record depreciation expense:

Depreciation Expense 12,000


3. Eliminating entry at December 31, 20x4, to eliminate intercompany sale of

equipment:

E(1) Equipment 66,000

Gain on Sale of Equipment 14,000



Eliminate unrealized profit on equipment.

Adjustment to equipment

Amount paid by WW to acquire building P150,000

Amount paid by LL on intercompany sale (84,000)

Adjustment to buildings and equipment P 66,000

Adjustment to depreciation expense

Depreciation expense recorded by Lance

Corporation (P84,000 / 7 years) P 12,000

Depreciation expense recorded by WW

Corporation (P150,000 / 15 years) (10,000)

Adjustment to depreciation expense P 2,000

Adjustment to accumulated depreciation

Amount required (P10,000 x 9 years) P 90,000

Amount reported by LL (P12,000 x 1 year) (12,000)

Required adjustment P 78,000

4. Eliminating entry at January 1, 20x4, to eliminate intercompany sale of equipment

and prepare a consolidated balance sheet only:

E(1) Equipment 66,000

Retained Earnings 12,000


Eliminate unrealized profit on equipment.

Problem II 1. Eliminating entry, December 31, 20x8:

E(1) Truck 55,000

Gain on Sale of Truck 35,000



Computation of gain on sale of truck:

Price paid by Minnow P245,000

Cost of truck to Frazer P300,000

Accumulated depreciation

(P300,000 / 10 years) x 3 years ( 90,000) (210,000)

Gain on sale of truck P 35,000

Accumulated depreciation adjustment:

Required [(P300,000 / 10 years) x 4 years] P120,000

Reported [(P245,000 / 7 years) x 1 year] (35,000)

Required increase P 85,000

2. Eliminating entry, December 31, 20x9:

E(1) Truck 55,000

Retained Earnings 30,000





Reported [(P245,000 / 7 years) x 2 years] (70,000)

Required increase P 80,000

Problem III a. Eliminating entry, December 31, 20x8:

E(1) Truck 90,000

Gain on Sale of Truck 30,000


Computation of gain on sale of truck:

Price paid by MM P210,000

Cost of truck to FF P300,000


(P300,000 / 10 years) x 4 years (120,000) (180,000)

Gain on sale of truck P 30,000

b. Eliminating entry, December 31, 20x9:

E(1) Truck 90,000

Retained Earnings, January 1 30,000





Recorded [(P210,000 / 6 years) x 1 year] (35,000)

Required increase P115,000

Problem IV

1 Equipment 540,000

Beginning R/E Prince (P100,000 .80) 80,000 Noncontrolling Interest (P100,000 .20) 20,000


Accumulated Depreciation (P100,000/4) 2 50,000


Beginning R/E Prince (P25,000 .80) 20,000 Noncontrolling Interest (P25,000 .20) 5,000

2 Controlling Interest in Consolidated Net Income:

Prince Companys income from its independent operations P3,270,000

Reported net income of Serf Company P820,000

Plus profit on intercompany sale of

equipment considered to be realized

through depreciation in 2014 25,000

Reported subsidiary income that has been

realized in transactions with third

parties 845,000

.8

Prince Companys share thereof 676,000 Controlling Interest in Consolidated net income P3,946,000

3. Noncontrolling Interest Calculation:

Reported income of Serf Company P820,000

Plus: Intercompany profit considered realized

in the current period 25,000

P845,000

Noncontrolling interest in Serf Company

(.20 845,000) P169,000

4. NCI-CNI (No. 3) P 169,000

CI-CNI (No. 2) 3,946,000

CNI P4,115,000

or, Consolidated Net Income for 20x5

P Companys net income from own/separate operations. P3,270,000

Realized gain on sale of equipment (downstream sales) through depreciation 0

P Companys realized net income from separate operations... P3,270,000

S Companys net income from own operations. P 820,000

Realized gain on sale of equipment (upstream sales) through depreciation* 25,000

Son Companys realized net income from separate operations*... P 845,000 845,000

Total P4,115,000

Less: Amortization of allocated excess 0

Consolidated Net Income for 20x5 P4,115,000

Less: Non-controlling Interest in Net Income* * 169,000

Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent 20x5..

P3,946,000

Or, alternatively Consolidated Net Income for 20x5


Realized gain on sale of equipment (downstream sales) through depreciation 0


S Companys net income from own operations. P820,000

Realized gain on sale of equipment (upstream sales) through depreciation 25,000

S Companys realized net income from separate operations... P 845,000 845,000

Total P4,115,000

Less: Non-controlling Interest in Net Income* * P 169,000

Amortization of allocated excess 0 169,000


equity holders of parent..

P3,946,000

Add: Non-controlling Interest in Net Income (NCINI) _169,000


**Non-controlling Interest in Net Income (NCINI) for 20x5

S Companys net income of Subsidiary Company from its own operations (Reported net income of S Company)

P 820,000


S Companys realized net income from separate operations P 845,000


P845,000

Multiplied by: Non-controlling interest %.......... 20%

Non-controlling Interest in Net Income (NCINI) partial goodwill P 169,000

1/1/20x4:

Selling price of equipment P 740,000

Less: BV of equipment

Cost P1,280,000

Less: Accumulated depreciation:

P1,280,000 / 8 years x 4 years* 640,000 640,000

Unrealized gain on sales 1/1/20x4 P 100,000

Realized gain depreciation: P100,000 / 4 years P 25,000 *the original life is 8 years as of 1/1/20x3, since the remaining life as of 1/1/20x4

in only 4 years, for purposes of computing the accumulated depreciation to

determine the gain on sale, the difference of 4 years is presumed to be expired.

5 Equipment 540,000

Beginning R/E Prince 100,000 Accumulated Depreciation 640,000

Accumulated Depreciation (P100,000/4) 2 50,000


Beginning R/E Prince 25,000

6 Controlling Interest in Consolidated Net Income:

Prince Companys income from its independent operations P3,270,000

Plus profit on intercompany sale of

equipment considered to be realized

through depreciation in 2014 25,000

P3,295,000

Reported net income of S Company P820,000

.8

Prince Companys share thereof 656,000 Controlling Interest in Consolidated net income P3,951,000

Noncontrolling Interest Calculation:

Reported income of S Company P820,000

Noncontrolling interest in S Company

(.20 820,000) P164,000

NCI-CNI P 164,000

CI-CNI 3,951,000

CNI P4,115,000

or, Consolidated Net Income for 20x5


Realized gain on sale of equipment (downstream sales) through depreciation

____25,000



Realized gain on sale of equipment (upstream sales) through depreciation* 0

S Companys realized net income from separate operations*... P 820,000 820,000

Total P4,115,000






P3,951,000



Realized gain on sale of equipment (downstream sales) through depreciation 25,000


S Companys net income from own operations. P820,000

Realized gain on sale of equipment (upstream sales) through depreciation 0

S Companys realized net income from separate operations... P 820,000 820,000

Total P4,115,000


Amortization of allocated excess 0 164,000



P3,951,000

Add: Non-controlling Interest in Net Income (NCINI) _169,000


**Non-controlling Interest in Net Income (NCINI) for 20x5


P 820,000

Realized gain on sale of equipment (upstream sales) through depreciation 0



P820,000



Problem V

Requirements 1 to 4

Schedule of Determination and Allocation of Excess (Partial-goodwill)

Date of Acquisition January 1, 20x4 Fair value of Subsidiary (80%)

Consideration transferred.. P 372,000 Less: Book value of stockholders equity of S: Common stock (P240,000 x 80%). P 192,000 Retained earnings (P120,000 x 80%)... 96,000 288,000 Allocated excess (excess of cost over book value).. P 84,000 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P6,000 x 80%) P 4,800 Increase in land (P7,200 x 80%). 5,760 Increase in equipment (P96,000 x 80%) 76,800

Decrease in buildings (P24,000 x 80%)..... ( 19,200) Decrease in bonds payable (P4,800 x 80%) 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over

fair value)... P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co.

Book value

S Co.

Fair value

(Over) Under

Valuation

Inventory... P 24,000 P 30,000 P 6,000 Land 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000

Buildings (net) 168,000 144,000 (24,000)

Bonds payable (120,000) ( 115,200) 4,800 Net.. P 204,000 P 294,000 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

S Co.

Book value

S Co.

Fair value

Increase

(Decrease)

Equipment.................. 180,000 180,000 0

Less: Accumulated depreciation.. 96,000 - ( 96,000) Net book value... 84,000 180,000 96,000

S Co.

Book value

S Co.

Fair value

(Decrease)

Buildings................ 360,000 144,000 ( 216,000)

Less: Accumulated depreciation.. 1992,000 - ( 192,000) Net book value... 168,000 144,000 ( 24,000)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized

Over/

Under Life

Annual

Amount

Current

Year(20x4) 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P -

Subject to Annual Amortization

Equipment (net)......... 96,000 8 12,000 12,000 12,000

Buildings (net) (24,000) 4 ( 6,000) ( 6,000) (6,000)

Bonds payable 4,800 4 1,200 1,200 1,200

P 13,200 P 13,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the

controlling interest and the NCI based on the percentage of total goodwill each equity interest

received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed

as follows:

Fair value of Subsidiary (100%)

Consideration transferred: Cash (80%) P 372,000

Fair value of NCI (given) (20%) 93,000

Fair value of Subsidiary (100%) P 465,000

Less: Book value of stockholders equity of S (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value).. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities

(P90,000 x 100%) 90,000

Positive excess: Full-goodwill (excess of cost over


In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling

interest of 20% computed as follows:

Value % of Total

Goodwill applicable to parent P12,000 80.00% Goodwill applicable to NCI.. 3,000 20.00% Total (full) goodwill.. P15,000 100.00%

The goodwill impairment loss would be allocated as follows Value % of Total

Goodwill impairment loss attributable to parent or controlling

Interest

P 3,000 80.00%

Goodwill applicable to NCI.. 750 20.00% Goodwill impairment loss based on 100% fair value or full-

Goodwill

P 3,750

100.00%

The unrealized and gain on intercompany sales for 20x4 are as follows:

Date

of Sale

Seller

Selling

Price

Book

Value

Unrealized*

Gain on sale

Remaining

Life

Realized gain depreciation**

20x4

4/1/20x4 P Co. P90,000 P75,000 P15,000 5 years P3,000/year P2,250

1/2/20x4 S Co. 60,000 28,800 31,200 8 years P3,900/year P3,900 * selling price less book value

** unrealized gain divided by remaining life; 20x4 P3,000 x 9/12 = P2,250

20x4: First Year after Acquisition

Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in S Company 372,000 Cash.. 372,000 Acquisition of S Company.

January 1, 20x4 December 31, 20x4: (2) Cash 28,800 Dividend income (P36,000 x 80%). 28,800 Record dividends from S Company.

No entries are made on the parents books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory.

Consolidation Workpaper Year of Acquisition (E1) Common stock S Co 240,000

Retained earnings S Co 120.000

Investment in S Co 288,000

Non-controlling interest (P360,000 x 20%).. 72,000 To eliminate intercompany investment and equity accounts

of subsidiary on date of acquisition; and to establish non-controlling

interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory. 6,000

Accumulated depreciation equipment.. 96,000

Accumulated depreciation buildings.. 192,000

Land. 7,200

Discount on bonds payable. 4,800

Goodwill. 12,000

Buildings.. 216,000

Non-controlling interest (P90,000 x 20%).. 18,000

Investment in S Co. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non-

controlling interest (in net assets of subsidiary) on date of acquisition.

(E3) Cost of Goods Sold. 6,000

Depreciation expense.. 6,000


Interest expense 1,200

Goodwill impairment loss. 3,000

Inventory.. 6,000


Discount on bonds payable 1,200

Goodwill 3,000 To provide for 20x4 impairment loss and depreciation and

amortization on differences between acquisition date fair value and

book value of Sons identifiable assets and liabilities as follows:

Cost of

Goods

Sold

Depreciation/

Amortization

Expense

Amortization

-Interest

Total

Inventory sold P 6,000

Equipment P 12,000

Buildings ( 6,000)

Bonds payable _______ _______ P 1,200

Totals P 6,000 P 6,000 P1,200 13,200

(E4) Dividend income - P. 28,800


Dividends paid S 36,000 To eliminate intercompany dividends and non-controlling interest

share of dividends.

(E5) Gain on sale of equipment 15,000

Equipment 30,000

Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its

original cost to the consolidate entity (along with its accumulated

depreciation at the point of the intercompany sale).


Equipment 12,000

Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its



(E7) Accumulated depreciation.. 2,250

Depreciation expense 2,250 To adjust downstream depreciation expense on equipment sold to

subsidiary, thus realizing a portion of the gain through depreciation

(P15,000 / 5 years x 9/12 = P2,250).


Depreciation expense 3,900 To adjust upstream depreciation expense on equipment sold to

parent, thus realizing a portion of the gain through depreciation

(P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary 10,140

Non-controlling interest .. 10,140 To establish non-controlling interest in subsidiarys adjusted net income for 20x4 as follows:

Net income of subsidiary.. P 91,200

Unrealized gain on sale of equipment

(upstream sales)

( 31,200)

Realized gain on sale of equipment (upstream

sales) through depreciation

3,900

S Companys realized net income from separate operations

P 63,900

Less: Amortization of allocated excess [(E3)]. 13,200

P 50,700


Non-controlling Interest in Net Income (NCINI) partial goodwill

P 10,140

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest

percentage or what option used to value non-controlling interest or goodwill.

Worksheet for Consolidated Financial Statements, December 31, 20x4.

Cost Model (Partial-goodwill)

80%-Owned Subsidiary

December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P480,000 P240,000 P 720,000

Gain on sale of equipment

15,000

31,200

(5) 15,000

(6) 31,200

Dividend income 28,800 - (4) 28,800 _________

Total Revenue P523,800 P271,200 P 720,000

Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000

Depreciation expense

60,000

24,000

(3) 6,000

(7) 2,250

(8) 3,900

83,850

Interest expense - - (3) 1,200 1,200

Other expenses 48,000 18,000 66,000

Goodwill impairment loss - - (3) 3,000 3,000

Total Cost and Expenses P312,000 P180,000 P 502,050

Net Income P211,800 P 91,200 P 217,950

NCI in Net Income - Subsidiary - - (9 10,140 ( 10,140)

Net Income to Retained Earnings P211,800 P 91,200 P 207,810

Statement of Retained Earnings

Retained earnings, 1/1

P Company P360,000 P 360,000

S Company P120,000 (1) 120,000

Net income, from above 211,800 91,200 207,810

Total P571,800 P211,200 P 567,810

Dividends paid

P Company 72,000 72,000

S Company - 36,000 (4) 36,000 _ ________

Retained earnings, 12/31 to Balance

Sheet P499,800 P175,200 P 495,810

Balance Sheet

Cash. P 232,800 P 90,000 P 322,800

Accounts receivable.. 90,000 60,000 150,000

Inventory. 120,000 90,000 (2) 6,000 3) 6,000 210,000

Land. 210,000 48,000 (2) 7,200 265,200

Equipment

240,000

180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000 (2) 216,000 1,044,000

Discount on bonds payable (2) 4,800 (3) 1,200 3,600

Goodwill (2) 12,000 (3) 3,000 9,000


(1) 288,000

(2) 84,000 -

Total P1,984,800 P1,008,000 P2,466,600


- equipment

P 135,000

P 96,000

(3) 96,000

(7) 2,250

(8) 3,900

(3) 12,000

(5) 45,000

(6) 43,200 P229,050


- buildings

405,000

288,000

(2) 192,000

(3) 6,000 495,000

Accounts payable 105,000 88,800 193,800

Bonds payable 240,000 120,000 360,000

Common stock, P10 par 600,000 600,000

Common stock, P10 par 240,000 (1) 240,000

Retained earnings, from above 499,800 175,200 495,810

Non-controlling interest

_________

_________

(4) 7,200

__________

(1 ) 72,000

(2) 18,000

(9) 10,140 ____92,940

Total P1,984,800 P1,008,000 P 834,450 P 834,450 P2,466,600

20x5: Second Year after Acquisition P Co. S Co.

Sales P 540,000 P 360,000

Less: Cost of goods sold 216,000 192,000

Gross profit P 324,000 P 168,000

Less: Depreciation expense 60,000 24,000

Other expense 72,000 54,000

Net income from its own separate operations P 192,000 P 90,000

Add: Dividend income 38,400 -

Net income P 230,400 P 90,000

Dividends paid P 72,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Cost Model Entry

Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 December 31, 20x5:

Cash 38,400

Dividend income (P48,000 x 80%). 38,400

Record dividends from S Company.

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid 48,000

Cash 48,000

Dividends paid by S Co..

Consolidation Workpaper Second Year after Acquisition The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment in S Company 44,160

Retained earnings P Company 44,160 To provide entry to convert from the cost method to the equity

method or the entry to establish reciprocity at the beginning of the

year, 1/1/20x5, computed as follows:

Retained earnings S Company, 1/1/20x5 P175,200

Retained earnings S Company, 1/1/20x4 120,000

Increase in retained earnings.. P 55,200

Multiplied by: Controlling interest % 80%

Retroactive adjustment P 44,160

Entry (1) above is needed only for firms using the cost method to account for their investments in

the subsidiary. If the parent is already using the equity method, there is no need to convert to

equity.

(E2) Common stock S Co 240,000

Retained earnings S Co., 1/1/20x5 175,200

Investment in S Co (P415,200 x 80%) 332,160


of subsidiary and to establish non-controlling interest (in net assets of

subsidiary) on January 1, 20x5.




Land. 7,200


Goodwill. 12,000

Buildings.. 216,000

Non-controlling interest (P90,000 x 20%) 18,000


controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on

partial-goodwill]

13,560

Non-controlling interests (P13,200 x 20%). 2,640




Inventory.. 6,000



Goodwill 3,000 To provide for years 20x4 and 20x5 depreciation and amortization on

differences between acquisition date fair value and book value of

Sons identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfects retained earnings & NCI;

Year 20x5 amounts are debited to respective nominal accounts.

(20x4)

Retained

earnings,

Depreciation/

Amortization

expense

Amortization

-Interest


Equipment 12,000 P 12,000

Buildings (6,000) ( 6,000)

Bonds payable 1,200 ________ P 1,200

Sub-total P13,200 P 6,000 P 1,200

Multiplied by: 80%

To Retained earnings P 10,560

Impairment loss 3,000

Total P 13,560




share of dividends.

(E5) Retained Earnings P Company, 1/1/20x5 15,000

Equipment 30,000




(E6) Retained EarningsP Company, 1/1/20x5 (P31,200 x 80%) 24,960


Equipment 12,000





Depreciation expense (current year) 3,000

Retained EarningsP Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to




Retained EarningsP Co. 1/1/20x5 (P3,900 x 80%) 3,120

Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to


(P31,200/85 years x 1 year = P3,900).






3,900

S Companys Realized net income* P 93,900

Less: Amortization of allocated excess ( 7,200)

P 86,700


Non-controlling Interest in Net Income (NCINI)

partial goodwill P 17,340

*from separate transactions that has been realized in transactions

with third persons.


Cost Model (Partial-goodwill)


December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P540,000 P360,000 P 900,000

Dividend income 38,400 - (5) 38,400 ___________


Cost of goods sold P216,000 P192,000 P 408,000


60,000

24,000

(4) 6,000

(7)

3,000

(8)

3,900

83,100


Other expenses 72,000 54,000 126,000

Goodwill impairment loss - - -


Net Income P230,400 P 90,000 P 281,700

NCI in Net Income - Subsidiary - - (9) 17,340 ( 17,340)




P Company

P499,800

(1) 13,560

(5) 15,000

(6) 24,960

(1) 44,160

(7) 2,250

(8) 3,120 P 495,810

S Company P 175,200 (2) 175,200

Net income, from above 230,400 __90,000 264,360

Total P730,200 P265,200 P 760,170

Dividends paid

P Company 72,000 72,000

S Company - 48,000 (5) 48,000 _ ________


Sheet P658,200 P217,200 P 688,170

Balance Sheet

Cash. P 265,200 P 102,000 P 367,200


Inventory. 216,000 108,000 (1) 6,000 (2) 6,000 324,000

Land. 210,000 48,000 (3) 7,200 265,200

Equipment

240,000

180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000 (3) 216,000 1,044,000


Goodwill (3) 12,000 (4) 3,000 9,000

Investment in S Co 372,000 (1) 44,160

(2) 332,160

(3) 84,000 -

Total P2,203,200 P1,074,000 P2,749,800


- equipment

P 150,000

P 102,000

(3) 96,000

(7) 5,250

(8) 7,800

(4) 24,000

(5) 45,000

(6) 43,200 P 255,150


- buildings

450,000

306,000

(3) 192,000

(4) 12,000 552,000


Bonds payable 240,000 120,000 360,000





___ _____

_________

(4) 2,640

(5) 9,600

(6) 6,240

__________

(2 83,040

(3) 18,000

(8) 780

(9) 17,340 ____100,680

Total P2,203,200 P1,074,000 P 979,350 P 979,350 P2,749,800

5. 1/1/20x4

a. On date of acquisition the retained earnings of parent should always be considered as

the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4

Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4

Common stock Subsidiary Company P 240,000

Retained earnings Subsidiary Company. 120,000

Stockholders equity Subsidiary Company... P 360,000

Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000

Fair value of stockholders equity of subsidiary, January 1, 20x4 P 450,000

Multiplied by: Non-controlling Interest percentage... 20

Non-controlling interest (partial goodwill),.. P 90,000

c. Consolidated SHE:

Stockholders Equity

Common stock, P10 par P 600,000

Retained earnings 360,000

Parents Stockholders Equity / CI SHE P 960,000

NCI, 1/1/20x4 ___90,000

Consolidated SHE, 1/1/20x4 P1,050,000

6.

Note: The goodwill recognized on consolidation purely relates to the parents share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not

recognized.

12/31/20x4:

a. CI-CNI - P Consolidated Net Income for 20x4

P Companys net income from own/separate operations. P183,000

Unrealized gain on sale of equipment (upstream sales) (15,000)


P Companys realized net income from separate operations*... P170,250


Unrealized gain on sale of equipment (upstream sales) ( 31,200)



Total P234,150


Amortization of allocated excess (refer to amortization above) 13,200

Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340



P207,810

Add: Non-controlling Interest in Net Income (NCINI) _ 10,140

Consolidated Net Income for 20x4 P217,950

*that has been realized in transactions with third parties.

b. NCI-CNI P10,140 **Non-controlling Interest in Net Income (NCINI) for 20x4


P 91,200




Less: Amortization of allocated excess / goodwill impairment

(refer to amortization table above)

13,200

P 50,700




c. CNI, P217,950 refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed

as follows:

Consolidated Retained Earnings, December 31, 20x4


Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent for 20x4

207,810

Total P567,810

Less: Dividends paid Parent Company for 20x4 72,000

Consolidated Retained Earnings, December 31, 20x4 P495,810

e.

The goodwill recognized on consolidation purely relates to the parents share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is

not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as

follows: Non-controlling interest (partial-goodwill), December 31, 20x4

Common stock Subsidiary Company, December 31, 20x4 P 240,000

Retained earnings Subsidiary Company, December 31, 20x4

Retained earnings Subsidiary Company, January 1, 20x4 P120,000

Add: Net income of subsidiary for 20x4 91,200

Total P211,200

Less: Dividends paid 20x4 36,000 175,200

Stockholders equity Subsidiary Company, December 31, 20x4 P 415,200

Adjustments to reflect fair value - (over) undervaluation of assets and

liabilities, date of acquisition (January 1, 20x4)

90,000

Amortization of allocated excess (refer to amortization above) 20x4 ( 13,200)

Fair value of stockholders equity of subsidiary, December 31, 20x4 P492,000



Realized stockholders equity of subsidiary, December 31, 20x4 P464,700


Non-controlling interest (partial-goodwill).. P 92,940

f. Consolidated SHE:

Stockholders Equity



Parents Stockholders Equity / CI SHE, 12/31/20x4 P1,095,810

NCI, 12/31/20x4 ___92,940


12/31/20x5:

a. CI-CNI P264,360 Consolidated Net Income for 20x5







Total P288,900

Less: Amortization of allocated excess 7,200





P264,360









Total P288,900


Amortization of allocated excess 7,200 24,540



P264,360





S Companys net income of Subsidiary Company from its own operations (Reported net income of Son Company)

P 90,000




P 86,700




as follows: Consolidated Retained Earnings, December 31, 20x5

Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800

Less: Downstream - net unrealized gain on sale of equipment prior to 20x5 (P15,000 P2,250)

12,750

Adjusted Retained Earnings Parent 1/1/20x5 (cost model ) Son Companys Retained earnings that have been realized in transactions with third

parties..

P487,050

Adjustment to convert from cost model to equity method for purposes of

consolidation or to establish reciprocity:/Parents share in adjusted net increased in subsidiarys retained earnings:

Retained earnings Subsidiary, January 1, 20x5 P 175,200

Less: Retained earnings Subsidiary, January 1, 20x4 120,000

Increase in retained earnings since date of acquisition P 55,200

Less: Amortization of allocated excess 20x4 13,200

Upstream - net unrealized gain on sale of equipment prior to 20x5 (P31,200 P3,900)

27,300

P 14,700

Multiplied by: Controlling interests %................... 80%

P 11,760

Less: Goodwill impairment loss 3,000 __ 8,760

Consolidated Retained earnings, January 1, 20x5 P495,810



264,360

Total P760,170



*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by

80%. There might be situations where the controlling interests on goodwill impairment loss would not be

proportionate to NCI acquired (refer to Illustration 15-6).

Or, alternatively: Consolidated Retained Earnings, December 31, 20x5

Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200

Less: Downstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P15,000 P2,250 P3,000)

9,750

Adjusted Retained Earnings Parent 12/31/20x5 (cost model ) S Companys Retained earnings that have been realized in transactions with third parties..

P648,450



Retained earnings Subsidiary, December 31, 20x5 P 217,200



Less: Accumulated amortization of allocated excess 20x4 and 20x5 (P11,000 + P6,000)

20,400

Upstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P31,200 P3,900 P3,900)

23,400

P 53,400


P 42,720

Less: Goodwill impairment loss 3,000 39,720

Consolidated Retained earnings, December 31, 20x5 P688,170

e. Non-controlling interest (partial-goodwill), December 31, 20x5





Total P 265,200





90,000

Amortization of allocated excess (refer to amortization above) :

20x4 P 13,200

20x5 7,200 ( 20,400)

Fair value of stockholders equity of subsidiary, December 31, 20x5 P 526,800

Less: Upstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P31,200 P3,900 P3,900)

23,400

Realized stockholders equity of subsidiary, December 31, 20x5. P503,400


Non-controlling interest (partial goodwill).. P 100,680


Stockholders Equity




NCI, 12/31/20x5 __100,680


Problem VI

Requirements 1 to 4

Schedule of Determination and Allocation of Excess

Date of Acquisition January 1, 20x4

Fair value of Subsidiary (80%)

Consideration transferred (80%).. P 372,000

Fair value of NCI (given) (20%).. 93,000

Fair value of Subsidiary (100%). P 465,000

Less: Book value of stockholders equity of Son:

Common stock (P240,000 x 100%). P 240,000

Retained earnings (P120,000 x 100%)... 120,000 360,000

Allocated excess (excess of cost over book value).. P 105,000

Less: Over/under valuation of assets and liabilities:

Increase in inventory (P6,000 x 100%) P 6,000

Increase in land (P7,200 x 100%). 7,200

Increase in equipment (P96,000 x 100%) 96,000

Decrease in buildings (P24,000 x 100%)..... ( 24,000)

Decrease in bonds payable (P4,800 x 100%) 4,800 90,000

Positive excess: Full-goodwill (excess of cost over


A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized

Over/

under Life

Annual

Amount

Current

Year(20x4) 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P -

Subject to Annual Amortization

Equipment (net)......... 96,000 8 12,000 12,000 12,000

Buildings (net) (24,000) 4 ( 6,000) ( 6,000) (6,000)

Bonds payable 4,800 4 1,200 1,200 1,200

P 13,200 P 13,200 P 7,200

20x4: First Year after Acquisition

Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in S Company 372,000 Cash.. 372,000 Acquisition of S Company.

January 1, 20x4 December 31, 20x4: (2) Cash 28,800 Dividend income (P36,000 x 80%). 28,800 Record dividends from S Company.


Dividends paid 36,000 Cash. 36,000 Dividends paid by S Co..

No entries are made on the parents books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4.

Consolidation Workpaper First Year after Acquisition (E1) Common stock S Co 240,000

Retained earnings S Co 120.000



of subsidiary on date of acquisition; and to establish non-controlling

interest (in net assets of subsidiary) on date of acquisition.




Land. 7,200


Goodwill. 15,000

Buildings.. 216,000

Non-controlling interest (P90,000 x 20%) + [(P15,000, full P12,000, partial goodwill)]

21,000


controlling interest (in net assets of subsidiary) on date of acquisition.

Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity

goodwill and hence is exposed to impairment loss on goodwill. PAS 36 requires the impairment

loss to be pro-rated between the parent and NCI on the same basis as that on which profit or

loss is allocated. In other words, the impairment loss is not pro-rated in accordance with the

proportion of goodwill recognized by parent and NCI.

(E3) Cost of Goods Sold. 6,000




Goodwill impairment loss. 3,750

Inventory.. 6,000



Goodwill 3,750 To provide for 20x4 impairment loss and depreciation and

amortization on differences between acquisition date fair value and

book value of Sons identifiable assets and liabilities as follows:

Cost of

Goods

Sold

Depreciation/

Amortization

Expense

Amortization

-Interest


Equipment P12,000

Buildings ( 6,000)

Bonds payable _______ _______ P 1,200

Totals P 6,000 P 6,000 P1,200




share of dividends.


Equipment 30,000





Equipment 12,000





Depreciation expense 2,250 To adjust downstream depreciation expense on equipment sold to


(P15,000 / 5 years x 9/12 = P2,250).


Depreciation expense 3,900 To adjust upstream depreciation expense on equipment sold to


(P31,200/85 years x 1 year = P3,900).




Unrealized gain on sale of equipment

(upstream sales)

( 31,200)



3,900

S Companys realized net income from

separate operations P 63,900

Less: Amortization of allocated excess [(E3)]. 13,200

P 50,700


Non-controlling Interest in Net Income (NCINI) partial goodwill

P 10,140

Less: Non-controlling interest on impairment

loss on full-goodwill (P3,750 x 20%) or

(P3,750 impairment on full-goodwill less

P3,000, impairment on partial-goodwill)

750

Non-controlling Interest in Net Income (NCINI) P 9,390


Cost Model (Full-goodwill)


December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P480,000 P240,000 P 720,000

Gain on sale of equipment

15,000

31,200

(5) 15,000

(6) 31,200

Dividend income 28,800 - (4) 28,800 _________


Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000


60,000

24,000

(3) 6,000

(7) 2,250

(8) 3,900

83,850


Other expenses 48,000 18,000 66,000

Goodwill impairment loss - - (3) 3,750 3,750


Net Income P211,800 P 91,200 P 217,200





P Company P360,000 P 360,000

S Company P120,000 (1) 120,000


Total P571,800 P211,200 P 567,810

Dividends paid

P Company 72,000 72,000

S Company - 36,000 (4) 36,000 _ ________


Sheet P499,800 P175,200 P 495,810

Balance Sheet

Cash. P 232,800 P 90,000 P 322,800


Inventory. 120,000 90,000 (2) 6,000 3) 6,000 210,000

Land. 210,000 48,000 (2) 7,200 265,200

Equipment

240,000

180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000 (2) 216,000 1,044,000


Goodwill (2) 15,000 (3) 3,750 11,250


(1) 288,000

(2) 84,000 -

Total P1,984,800 P1,008,000 P2,468,850


- equipment

P 135,000

P 96,000

(2) 80,000

(7) 2,250

(8) 3,900

(3) 10,000

(5) 45,000

(6) 43,200 P229,050


- buildings

405,000

288,000

(2) 192,000

(3) 6,000 495,000


Bonds payable 240,000 120,000 360,000





_________

_________

(3) 7,200

__________

(1 ) 72,000

(2) 21,000

(9) 9,390 ____95,190

Total P1,984,800 P1,008,000 P 843,690 P 843,690 P2,468,850

20x5: Second Year after Acquisition P Co. S Co.

Sales P 540,000 P 360,000

Less: Cost of goods sold 216000 192,000

Gross profit P 324,000 P 168,000

Less: Depreciation expense 60,000 24,000

Other expense 72,000 54,000

Net income from its own separate operations P 192,000 P 90,000

Add: Dividend income 38,400 -

Net income P 230,400 P 90,000

Dividends paid P 72,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Cost Model Entry January 1, 20x5 December 31, 20x5:

Cash 38,400

Dividend income (P48,000 x 80%). 38,400

Record dividends from S Company.


Dividends paid 48,000

Cash 48,000

Dividends paid by S Co..

Consolidation Workpaper Second Year after Acquisition (E1) Investment in S Company 44,160

Retained earnings P Company 44,160 To provide entry to convert from the cost method to the equity

method or the entry to establish reciprocity at the beginning of the

year, 1/1/20x5, computed as follows:

Retained earnings S Company, 1/1/20x5 P175,200

Retained earnings S Company, 1/1/20x4 120,000

Increase in retained earnings.. P 55,200

Multiplied by: Controlling interest % 80%

Retroactive adjustment P 44,160

(E2) Common stock S Co 240,000

Retained earnings S Co., 1/1/20x5 175,200

Investment in S Co (P415,200 x 80%) 332,160


of subsidiary and to establish non-controlling interest (in net assets of

subsidiary) on January 1, 20x5.




Land. 7,200


Goodwill. 15,000

Buildings.. 216,000

Non-controlling interest (P90,000 x 20%) + [(P15,000, full P12,000, partial goodwill)]

21,000


controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on

partial-goodwill]

13,560

Non-controlling interests (P16,950 x 20%) or (P13,200 x 20% +

(P3,750 P3,000 = P750)

3,390




Inventory.. 6,000



Goodwill 3,750 To provide for years 20x4 and 20x5 depreciation and amortization on

differences between acquisition date fair value and book value of

Sons identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfects retained earnings & NCI;

Year 20x5 amounts are debited to respective nominal accounts.

(20x4)

Retained

earnings,

Depreciation/

Amortization

expense

Amortization

-Interest


Equipment 12,000 P 12,000

Buildings (6,000) ( 6,000)

Bonds payable 1,200 ________ P 1,200

Sub-total P13,200 P 6,000 P 1,200

Multiplied by: 80%

To Retained earnings P 10,560

Impairment loss 3,000

Total P 13,560




share of dividends.

(E6) Retained Earnings P Company, 1/1/20x5 15,000

Equipment 30,000




(E7) Retained EarningsP Company, 1/1/20x5 (P31,200 x 80%) 24,960


Equipment 12,000






Retained EarningsP Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to




Retained EarningsP Co. 1/1/20x5 (P3,900 x 80%) 3,120

Non-controlling interest (P3,900 x 20%) 780 To adjust upstream depreciation expense on equipment sold to


(P31,200/85 years x 1 year = P3,900).






3,900

S Companys Realized net income* P 93,900

Less: Amortization of allocated excess ( 7,200)

P 86,700


Non-controlling Interest in Net Income (NCINI P 17,340

Less: NCI on goodwill impairment loss on full-

Goodwill

0

Non-controlling Interest in Net Income (NCINI) P 17,340

*from separate transactions that has been realized in transactions

with third persons.


Cost Model (Full-goodwill)


December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P540,000 P360,000 P 900,000

Dividend income 38,400 - (5) 38,400 ___________


Cost of goods sold P216,000 P192,000 P 408,000


60,000

24,000

(4) 6,000

(8)

3,000

(9)

3,900

83,100


Other expenses 72,000 54,000 126,000

Goodwill impairment loss - - -


Net Income P230,400 P 90,000 P 281,700





P Company

P499,800

(2) 13,560

(6) 15,00

(7) 24,960

(1) 44,160

(8) 2,250

(9) 3,120 P 495,810

S Company P 175,200 (1) 175,200


Total P730,200 P265,200 P 760,170

Dividends paid

P Company 72,000 72,000

S Company - 48,000 (5) 48,000 _ ________


Sheet P658,200 P217,200 P 688,170

Balance Sheet

Cash. P 265,200 P 102,000 P 367,200


Inventory. 216,000 108,000 (3) 6,000 (4) 6,000 324,000

Land. 210,000 48,000 (3) 7,200 265,200

Equipment

240,000

180,000

(6) 30,000

(7) 12,000 462,000

Buildings 720,000 540,000 (3) 216,000 1,044,000


Goodwill (3) 15,000 (4) 3,750 11,250

Investment in S Co 372,000 (1) 44,160

(2) 332,160

(3) 90,000 -

Total P2,203,200 P1,074,000 P2,752,050


- equipment

P 150,000

P 102,000

(3) 96,000

(8) 5,250

(9) 7,800

(4) 24,000

(6) 45,000

(7) 43,200 P 255,150


- buildings

450,000

306,000

(3) 192,000

(4) 12,000 552,000


Bonds payable 240,000 120,000 360,000





___ _____

_________

(4) 3,390

(5) 9,600

(7) 6,240

__________

(2 ) 83,040

(3) 21,000

(9) 780

(10) 17,340 ____102,930

Total P2,203,200 P1,074,000 P 983,100 P 983,100 P2,752,050

5. 1/1/20x4

a. On date of acquisition the retained earnings of parent should always be considered as

the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4


b. Non-controlling interest (partial-goodwill), January 1, 20x4

Common stock Subsidiary Company P 240,000

Retained earnings Subsidiary Company. 120,000

Stockholders equity Subsidiary Company... P 360,000

Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000

Fair value of stockholders equity of subsidiary, January 1, 20x4 P 450,000


Non-controlling interest (partial goodwill),.. P 90,000

Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill P10,000, partial goodwill)

3,000

Non-controlling interest (full-goodwill) P 93,000

c. Consolidated SHE:

Stockholders Equity



Parents Stockholders Equity / CI SHE P 960,000

NCI, 1/1/20x4 ___93,000


6.

Note: The goodwill recognized on consolidation purely relates to the parents share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not

recognized.

12/31/20x4:



Unrealized gain on sale of equipment (upstream sales) (15,000)







Total P234,150


Amortization of allocated excess (refer to amortization above) 13,200

Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340



P207,810

Add: Non-controlling Interest in Net Income (NCINI) 10,140





P 91,200




Less: Amortization of allocated excess / goodwill impairment

(refer to amortization table above)

13,200

P 50,700



Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x

20%) or (P3,750mpairment on full-goodwill less P3,000, impairment on

partial- goodwill)

750

Non-controlling Interest in Net Income (NCINI) full goodwill P 9,390







207,810

Total P567,810



e. Non-controlling interest (partial-goodwill), December 31, 20x4





Total P211,200





90,000

Amortization of allocated excess (refer to amortization above) 20x4 ( 13,200)

Fair value of stockholders equity of subsidiary, December 31, 20x4 P492,000



Realized stockholders equity of subsidiary, December 31, 20x4 P464,700


Non-controlling interest (partial-goodwill).. P 92,940

Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:

[(P15,000 full P12,000, partial = P3,000) P750 impairment loss

2,250

Non-controlling interest (full-goodwill).. P 95,190


Stockholders Equity




NCI, 12/31/20x4 ___95,190


12/31/20x5:








Total P288,900






P264,360









Total P288,900


Amortization of allocated excess 7,200 24,540



P264,360






P 90,000




P 86,700


Non-controlling Interest in Net Income (NCINI) - partial goodwill P 17,340

Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0

Non-controlling Interest in Net Income (NCINI) full goodwill . . . . . . . . . . . . . P 17,340



Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800

Less: Downstream - net unrealized gain on sale of equipment prior to 20x5 (P15,000 P2,250)

12,750

Adjusted Retained Earnings Parent 1/1/20x5 (cost model ) Son Companys Retained earnings that have been realized in transactions with third

parties..

P487,050



Retained earnings Subsidiary, January 1, 20x5 P 175,200



Less: Amortization of allocated excess 20x4 13,200

Upstream - net unrealized gain on sale of equipment prior to 20x5 (P31,200 P3,900)

27,300

P 14,700


P 11,760

Less: Goodwill impairment loss 3,000 __ 8,760

Consolidated Retained earnings, January 1, 20x5 P495,810



264,360

Total P760,170



*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by

80%. There might be situations where the controlling interests on goodwill impairment loss would not be

proportionate to NCI acquired (refer to Illustration 15-6).

Or, alternatively: Consolidated Retained Earnings, December 31, 20x5

Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200

Less: Downstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P15,000 P2,250 P3,000)

9,750

Adjusted Retained Earnings Parent 12/31/20x5 (cost model ) S Companys Retained earnings that have been realized in transactions with third parties..

P648,450



Retained earnings Subsidiary, December 31, 20x5 P 217,200



Less: Accumulated amortization of allocated excess 20x4 and 20x5 (P13,200 + P7,200)

20,400

Upstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P31,200 P3,900 P3,900)

23,400

P 53,400


P 42,720

Less: Goodwill impairment loss (full-goodwill) 3,000 39,720

Consolidated Retained earnings, December 31, 20x5 P688,170

e. Non-controlling interest, December 31, 20x5





Total P 265,200





90,000

Amortization of allocated excess (refer to amortization above) :

20x4 P 13,200

20x5 7,200 ( 20,400)

Fair value of stockholders equity of subsidiary, December 31, 20x5 P 526,800

Less: Upstream - net unrealized gain on sale of equipment prior to 12/31/20x5 (P31,200 P3,900 P3,900)

23,400

Realized stockholders equity of subsidiary, December 31, 20x5. P503,400


Non-controlling interest (partial goodwill).. P 100,680

Add: Non-controlling interest on full goodwill , net of impairment loss

[(P15,000 full P12,000, partial = P3,000) P750 impairment loss

2,250

Non-controlling interest (full-goodwill).. P 102,930


Stockholders Equity




NCI, 12/31/20x5 __102,930


Problem VII

20x4 20x5

1.

Noncontrolling interest in P 7,000 (1) P 46,200 (2)

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